Peru's Fiscal Challenges: Surging Deficit and Economic Repercussions

Peru faces increased budget deficits beyond its targets, raising concerns about financial stability. The economy, previously robust, now struggles with recession, worsened by political turmoil. A watchdog highlights risks to credit ratings and borrowing costs. Economic recovery is expected despite financial challenges driven by public spending and low revenues.

In a development raising alarms among financial analysts, Peru's government has reported a budget deficit surpassing its own targets, as confirmed by an autonomous state watchdog on Wednesday. The country's economy, which heavily relies on mining, has plunged into a technical recession due to enduring political and social unrest, although a rebound to 3.1% growth is anticipated this year.

Official data indicate the annual fiscal deficit reached 4.0% of Peru's GDP by the end of the second quarter. This figure notably exceeds the economy ministry's 2024 target of 2.8%. The widening deficit, the largest since 2020, poses a threat to the country's credit rating, potentially increasing public and private borrowing costs, according to the Fiscal Council, comprising former economy ministers.

Several contributing factors include heightened public expenditure and declining revenue, along with financial backing for the debt-laden state oil company, Petroperu. Despite expectations of additional revenue from copper price hikes, credit agency Fitch Ratings remains skeptical about meeting revised deficit targets this year. The situation marks the fourth breach of fiscal rules since 2000, indicating ongoing financial challenges for the nation.

(With inputs from agencies.)